What's Driving META Stock Higher?

META Platforms stock (NASDAQ: META) is up 5% in a month, with investor optimism around the TikTok ban. A federal appeals court recently upheld a law requiring TikTok’s owner ByteDance to find a new owner for its U.S. operations, outside of China, by January 19, 2025, or face a ban. If TikTok were to be banned in the U.S., it would have been a positive for Meta, with less competition in the social media space.

Even if we were to look at a slightly longer term, META stock has outperformed, with 83% returns since early 2022 — rising from levels of $335 then to around $620 now — vs. an increase of 28% for the broader S&P 500 index over this period. This 83% growth can be attributed to:

1. a 54% rise in the company’s earnings from $13.77 in 2021 to $21.17 now; and
2. a 19% growth in the company’s P/E ratio from 24.4x to 29x over this period.

Let’s dive deeper into these factors.

What’s Driving Meta’s Earnings Growth?

Meta Platforms is the world’s most popular social network that helps people connect with family and friends. The company makes money primarily through advertising, which it provides to advertisers by targeting specific demographics based on information posted by users on its platforms.

Meta Platforms’ revenue has risen 32.5% from $118 billion in 2021 to $156 billion for the last twelve month period. This can be attributed to rising ad impressions as well as an increase in the average price per ad. Also, Meta’s family daily active people (DAP) have risen 17% from 2.82 billion in 2021 to 3.29 billion now. Most of the company’s revenue comes from ad sales on Facebook, Instagram, Threads, and WhatsApp. The company is benefiting from its AI push, targeting more advertising. The company plans to use AI to generate more content.

Not only has the company’s sales risen in the last three years, its net income margin has expanded from 33.4% in 2021 to 35.6% now. Meta’s shares outstanding also declined by 8% over this period, thanks to the $122 billion the company spent on share repurchases. Higher revenues clubbed with margin expansion and fewer shares resulted in the company’s bottom line of $21.17 now, up 54% from $13.77 in 2021.

What’s Behind Rising Valuation Multiple?

Investors have rewarded Meta stock lately, as the rise in both ad impressions and average price per ad bodes well for the company’s sales. Furthermore, the company’s AI push is expected to help it generate higher advertising revenues, with an increase in user engagement and more effective targeting.

Furthermore, what may go well for Meta is the TikTok ban in the U.S. But, ByteDance has recently filed an emergency motion with an appeals court seeking a temporary block on the ban from taking effect. Meta stock declined nearly 2% after the news report of TikTok filing an emergency motion emerged.

Does META Stock Have Any Room For Growth?

At its current levels of $615, META stock is up a solid 74% this year. However, the increase in META stock over the recent years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 23% in 2021, -64% in 2022, and 194% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could META face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think META is fully valued now. We estimate Meta Platforms’ valuation to be $560 per share, slightly below the current market price. META stock is now trading at 29x trailing earnings of $21.17 per share. This compares with the stock’s average P/E ratio of 22x over the last four years. Although a slight rise in valuation multiple for META makes sense given the solid advertising growth lately, investors should take into account the risks. It’s still unclear how significant a boost AI can be for the company’s earnings growth, which makes the continued aggressive investments in AI a slight risk.

While META stock looks fully valued, it is helpful to see how Meta Platform’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/10/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.